Can the Australian Dollar stay near one-month highs as CPI and Fed take centre stage?

• AUD/USD posts modest gains despite US Dollar strength, with hawkish RBA expectations underpinning the Aussie.
• Expectations of a further RBA rate increase could gain traction following Wednesday’s Australian inflation release.
• Also in focus for traders are the testimony of RBA Governor Bullock and the Fed’s interest rate announcement.

The Australian Dollar (AUD) is outperforming its major peers on Tuesday, lifting AUD/USD modestly as markets anticipate a hawkish Reserve Bank of Australia (RBA). Easing worries about heavy AI spending have helped equity markets recover, providing further support to the risk-sensitive Aussie. However, US Dollar (USD) strength is capping gains in the pair, which is trading around 0.7027 at the time of writing, close to one-month highs.

Wednesday brings two key Australian events for traders: the inflation release and RBA Governor Michele Bullock’s testimony before parliament. Each could influence expectations for the RBA’s November interest rate decision. Later the same day, the Federal Reserve’s (Fed) monetary policy announcement will present a further important test for AUD/USD.

Forecasts point to a 0.7% increase in Australia’s headline Consumer Price Index (CPI) for September, compared with 0.4% in August. That would lift annual inflation from 4.0% to 4.2%. Inflation in the third quarter is projected to rise to 1.3%, against 0.6% in the second quarter.

For an indication of underlying price pressures, traders will scrutinise trimmed mean inflation as well. Following a 0.2% increase in August, the monthly reading is expected to rise 0.3% in September.

According to Brown Brothers Harriman’s Elias Haddad, the forthcoming inflation readings “would leave inflation above the RBA’s year-end forecasts of 3.6% for headline and 3.3% for trimmed mean,” lending weight to Deputy Governor Andrew Hauser’s recent warning that the inflation outlook is “materially worse” than assessed in August. In BBH’s view, “firmer inflation would also strengthen the case for a back-to-back 25bps RBA cash rate hike to 4.85% at the next November 3 meeting (70% pried in) and widen AUD’s yield advantage.”

The US Dollar, meanwhile, continues to recover from its recent weakness. Earlier, unease over AI-related equities had prompted investors to seek government bonds, driving Treasury yields down. Trading around 102.25 and close to two-week highs, the US Dollar Index (DXY) measures the Greenback against a basket of six major currencies.

Position adjustments ahead of the Fed’s interest rate decision are accompanying the rebound. After September’s increase of 25 basis points (bps), policymakers are widely expected to hold rates at 3.75%-4.00%. Attention will therefore centre on the policy statement and the press conference by Chair Kevin Warsh.

Inflation remains above the Fed’s 2% target, leaving traders to gauge whether policymakers bolster or moderate expectations for a December rate increase. The CME FedWatch Tool currently puts the market-implied probability at around 80%.